Monday 5 December 2016

Ireland and China - hard landing ahead?

How does the slowdown in Chinese growth impact upon Irish investors? asks Caitriona MacGuinness

Caitriona MacGuinness

Published 13/03/2016 | 02:30

The causes of China's reduced growth outlook are many, some due to clear decisions made by China's leaders, others due to areas outside their control. Photo: Getty Images
The causes of China's reduced growth outlook are many, some due to clear decisions made by China's leaders, others due to areas outside their control. Photo: Getty Images

While the post-election political talk in Ireland may be of Dail reform and the need to limit the power of the executive, such efforts to limit government influence were not a feature of last weekend's annual meeting of the National People's Congress in China.

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Top of the agenda was the announcement of reforms to the Chinese economy in an effort to stabilise market sentiment, with more focus on informing the population and less on discussion.

Chinese authorities are trying to avoid a 'hard landing' in an economy that has been growing so fast in recent years that a reduction in forecast growth to a range of 6.5pc to 7pc for 2016 is viewed as a worrying development.

Concerns about the outlook for Chinese economic growth have been gathering many headlines over the last year. We have seen significant volatility in stock markets, both in China and internationally. But how does the slowdown in China impact investors in Ireland, keeping in mind the exposure of Irish pension schemes to equity markets?

The effect is both direct and indirect. Looking at the direct exposure, the most likely impact for Irish investors will be through an allocation in their portfolio to an emerging markets equity fund, of which China typically represents about 20pc of the index.

With significant linkages between China and its near neighbours, this region as a whole tends to react strongly to developments in China.

Put simply, when China sneezes, Asia catches a cold and that can put a dent in returns of any emerging markets fund's performance. It is more difficult to consider the indirect exposure, with analysts divided about the impact of a Chinese slowdown on global markets.

However, given the high level of interdependencies in the global economy, it is likely that a significant slowdown in China would have reverberations across the developed world.

Particularly of concern is any significant rebalancing of the Renminbi, the Chinese currency, which, while making China more competitive in international trade, would cause volatility in global currency markets and trading dynamics.

The causes of China's reduced growth outlook are many, some due to clear decisions made by China's leaders, others due to areas outside their control.

Proactive attempts to rebalance the economy to be more service-oriented and hence to produce growth that is more sustainable into the future, along with targeted attempts to reduce corruption, are both positive developments.

However, both reduce the growth outlook in the near term.

Other challenges include a slowing global economy, as well as distorted property markets across this vast country and lack of clarity with regard to debt levels.

In many aspects, Chinese policymakers have been more open to allowing market forces to exert their influence. However, when periods of stress have arisen, there are often signs that they are not yet fully comfortable with entrusting the market with difficult decisions.

Last month, we saw the start of the Chinese year of the monkey, traditionally known for its unpredictable and volatile nature - and indeed, so far this year it has lived up to its reputation.

However, in contrast to 2015, when China dominated the headlines, so far in 2016 global markets have been more influenced by concerns about growth in developed markets, with a particular focus on the actions of policymakers to respond.

While emerging markets will likely continue to exert a strong influence on returns going forward and challenges remain in the emerging world, it would appear that a slip back into global recession seems unlikely. Still, risks remain and Mercer recommends a proactive approach to risk management in these volatile times.

Caitriona MacGuinness is a senior investment consultant at Mercer and president of CFA Society Ireland.

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